OVERVIEW

● Forex reserves retained an uptrend for the second successive month, in spite of looming concerns over the on-going US-China trade war and prospects of a waning global growth. Bank Negara Malaysia (BNM) foreign international reserves rose by USD0.3b or 0.3% MoM to USD102.4b as at February 28, after it increased by USD0.7b in January. Similar to the preceding month, February’s reserves position remains adequate to finance 7.4 months of retained imports and is 1.0 time the short-term external debt.

● The month’s increase in foreign reserves was mainly underpinned by a rise in foreign currency reserves, which edged higher by USD0.2b or 0.3% MoM (Jan: - 0.6%) to USD96.5b in February. Additionally, other reserve assets sustained a relatively strong growth of 4.5% (Jan: 4.8%), up by USD0.1b to USD2.3b in February.

● In Ringgit terms, the value of forex reserves rose by 0.2% MoM or RM0.9b, to RM423.3b as at end-February from RM422.3b previously. In February, the USDMYR was traded at an average of RM4.07 versus RM4.12 in the preceding month, appreciating as much as 1.0% MoM (Dec: +1.4%), charting its third month of appreciation primarily due to recovery in commodity prices. While the pattern was also observed for the Philippines Peso (+0.9%), the Ringgit’s performance has bucked the majority depreciating trend observed in other regional currencies, led by the Thai Baht (-1.1%) and followed by the Indonesian Rupiah (-0.7%), and Singapore Dollar (-0.5%), against the backdrop of heightened anxiety amidst the two rounds of US-China trade talks which took place during the month.

● Despite ample foreign reserves, uncertainties arising from external factors continue to pose risk to domestic financial market and economic growth. On the trade war front, tensions persist, though we remain cautiously optimistic following recent extension of the US-China trade negotiation deadline beyond the initial date of 1st March. Slowdown in key export markets, evidenced by dwindling high-frequency indicators, including in China, the US and eurozone, in spite of aggressive fiscal stimulus, may pass through as a harm to Malaysia’s domestic activity. As the US Federal Reserve and the European Central Bank adopt a more dovish stance this year, with larger monetary injections and fewer or no rate hike expected, outflow of hot money likely to wither, albeit still persisting amidst prolonged uncertainty.

● We maintain our view that Bank Negara Malaysia will hold the OPR steady at 3.25% in 2019 as domestic indicators are pointing towards growth moderation and inflation is expected to remain subdued. However, we expect BNM would gradually turn dovish and may not hesitate to cut interest rates should there be signs that external factors are increasingly threatening domestic growth. On the ringgit outlook, though its pick-up in the recent months may have legs, we still maintain our USDMYR year-end forecast at 4.10 on the back of softer economic condition and the natural tendency for global capital to flee to safe haven assets.

Source: Kenanga Research - 8 Mar 2019